Friday, November 13, 2015

Thoughts on Chicago's Growing Tech Scene, And How to Improve It Over Time

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I recently read a very good post on Chicago's tech scene: where it is today, from a talent and ecosystem perspective, and where it is heading. But, honestly, many of the recommendations herein can apply to any startup ecosystem that is in the early years of getting off the ground. It was written by my good colleague, Jeff Carter, an angel investor at West Loop Ventures, co-founder at Hyde Park Angels and author of the Points and Figures startup blog. Jeff was kind enough to let us share this post with all of our Red Rocket readers. So, here it is:

I think that Crain’s is very short sighted. Silicon Valley didn’t happen overnight. It’s fair to say that Fairchild-Republic and then PayPal really spawned a lot of the network. Facebook and Google are the result of that, and are also spawning their own networks. Chicago is the number seven startup city in the world.

Startups are not a zero sum game. We need to focus on growing the pie, not dividing the pie. Too often, analysis focuses on us versus them.Chicago will never be Silicon Valley. Why focus on it? Instead direct your attention on how to build the community. The rest will take care of itself.

Chicago’s startup community has had fits and starts since the late nineties. It really didn’t start to get rebuilt until 2006-07, and got real upward momentum in 2009.Building a community doesn’t happen overnight. In our hyper ventilated social media driven world, we focus on the short term. We want everything yesterday. That narrows our judgement.

Chicago has a lot of executive talent. It has an incredible pool of talent when it comes to finance, sales and marketing. Finance isn’t a skill startups readily need. They need sales and marketing, but they have been seeking it virtually instead of personally. With B2B SaaS based startups, that is changing.

I am also not convinced that Chicago doesn’t have existing non-traditional platform companies that spawn and attract tech talent. Chicago has a massive amount of tech talent. It just isn’t in startups right now. It’s sitting in high frequency trading firms. Chicago is attracting talent out of New York for trading. The epicenter of HFT is here.

There will come a time when the person coding HFT will look to do something else. Their expertise and skill is directly transferrable to startups. Predictive algorithms in trading can be used in places like healthcare, supply chain, fintech, insurance, and other industries that are strong in Chicago.

Chicago has had a series of small exits. It’s had some big exits too, but not with the frequency of places like New York, Boston or Silicon Valley. The harsh reality of startup investing is most of them exit between $20M-$60M. Chicago has had less trips to the plate to take a swing at a pitch. We need more swings.

It also takes a lot of time to change the way existing networks work. For years, engineering grads have beaten a path from the Midwest to Silicon Valley. They all can get jobs easily there so who can blame them? Getting them to start to come to Chicago will take time. I think that getting engineers to come to Chicago will fit with any behavioral cycle. We are in the early adopters stage right now.

Like any startup, we need to ask the question, “How can we accelerate the adoption?”

The first is build relationships. It’s critical for leaders of the Chicago tech community to become a physical presence on Midwestern engineering campuses.That means getting in the car and going to visit them. Set up office hours on campus. Speak in classes. Get your card out there.People buy from people. They want to work with friends. Building personal relationships is key.

Wednesday, I am speaking to a class at Chicago Booth and Thursday I am headed down to the University of Illinois all day to be with students. I try to get to Illinois a minimum of twice per year. Others are going to campuses but we need to be very proactive. We need to be going to the entire Big 10 and spreading the word.

Second, become a connector.Brad Feld likes to give people 8-10 ways to plug into the local community in Boulder. It’s not a lot of work to have a ready list of people/organizations/meetups to introduce other people to. Give a free introduction. It can mean the difference between someone coming to Chicago or someone going somewhere else. Everyone has a network. Don’t be afraid to use it.

That stuff is relatively easy. The other stuff is harder. Here are some observations on the other stuff.

Chicago needs significantly more seed stage capital. A lot more than you initially think. The more companies that get funded the more chances you have to build a platform company. Ironically, seed stage investing is less risky than later stage investing because of the optionality theory of investing. That’s the approach Andreessen-Horowitz takes.

Chicago people with the means to invest, need to invest. There is a lot of money that goes from Chicago to the coasts. It needs to find a home here. A lot of the Chicago money going to the coasts for VC is going because they perceive that there is less risk there. If they lose money out there, at least they lost money in the #1 startup ecosystem in the world. A money manager can’t lose too much face when that happens. But, outsize returns come from being away from the herd.

That attitude needs to change and a portion of that capital has to be invested in Chicago. We talk about getting over our Midwestern stigma of failure when it comes to startups. That has to happen when investing in them too.

There are a lot of people in Chicago that are simply afraid of investing in venture capital. They are 100% comfortable with doing private equity and real estate. Private equity invests in company’s that make stuff and generate profit (!) and real estate is simple to understand. That attitude has to change and it hopefully will over time.

Instead of writing that check to charity, it might be better in a startup. Divert a portion of your investing to startups instead of PE or Real Estate. Make sure it goes to a Chicago based fund that invests most of its capital locally.

Silicon Valley startups spread equity around to a lot of employees. If the startup becomes a massive company like Google, a lot of wealth is created. That wealth gets plowed back into more startups in the community. In Chicago, often that hasn’t been the case. Equity has been concentrated into a few people’s hands.

It’s important that employees receive equity. Even Jack Dorsey realized that andgave 1% of his stock in Twitter to his employees in order to build morale and help with retention. Think people will want to continue to work for him? Think he will have trouble recruiting employees the next time he does a startup?

Some of the equity allocation problem goes back to the fact that we have less winners in Chicago. When you get a winner, you want to hang on to it because you don’t know when you will get your next one. Founders here tend to raise less capital because it’s harder to get.

There are Midwesterners that moved to the coast and find that they are uncomfortable there, or unsatisfied there. We need to let them know it’s cool to move back. I know startup founders that have moved to the coast that will move back when they are done. I know executives of startup firms that moved there for a job, but their family is in Chicago. Or, they move there until the gig is over and then move back. Yes, the winters are truly winter, but the cost of living is a lot less. Income taxes and home prices are significantly lower, although property taxes are not. Midwesterners with experience can be a big part of building something bigger than themselves that didn’t exist before. There is good karma that comes with that.

Chicago likes to pick champions. It likes to have heroes. Often, it falls on organizations tied to politicians. In the startup world, that doesn’t work best. Everyone can be a hero. Anyone can be a catalyst to make something happen. Everyone can recruit, no matter if they have a big soap box or not. God bless JB Pritzker for his leadership and commitment, but he can’t do it all himself. He has done yeoman’s work above and beyond the call of duty. However, each of us needs to try and make something happen in our own way. Everyone is a valuable cog to help grow the community-see building relationships.

Chicago’s culture has traditionally been closed. It’s the biggest small town in America. Corrupt alderman Paddy Bauler’s “we don’t want nobody nobody sent” also extended to the broader community. This sort of makes sense historically. Coastal communities have a constant flow of immigrants flowing through them. It’s not about “who you know”, but “can you do it?” Chicago has been a place where immigrants landed and put down roots. It made sense that they wanted to know their neighbors and where they were from.

Currently, we are doing a pretty good job in the startup community of fighting history. The community is extremely welcoming and supportive of women. It needs to be that way with everyone (even Republicans!). We need to constantly make sure our arms are open, and not crossed.

We can use this small town mentality to our advantage too! The network should be easier to navigate and quicker to get through. Entrepreneurs should find it easier to get things done.

One of the greatest engines of broad based wealth in Chicago is dead. The three trading floors created more millionaires per square foot than any other place on the planet. Creating a thriving startup community in Chicago can replicate what the trading floors did. The state of Illinois, and the city of Chicago need that to happen to ensure long term financial stability, and viability.

UPDATE

Getting some private emails from people that I agree with. One handicap the Midwest is creating for itself is the lack of risk tolerance on behalf of local companies to become customers.

We often decry the risk tolerance of investors (see above), but we often fail to talk about the risk tolerance of customers.

The Midwest is home to many Fortune 1000 firms-but for startups they are awfully hard to sell to. As my friend Bob Geras likes to say, “the best way to increase your bottom line is to increase your top line”. I know of more than one Midwestern startup that has moved because they have found it easier to sell on the coasts than in the Midwest.

Additionally, Midwestern governments are incredibly hard to sell to. There has been a lot of lip service from government officials toward supporting the startup community. The best way they can do it is to make it really easy to buy from them.

If you want to grow the startup community, become a customer of one. Download their apps. Take a sales call and try their product. If you can’t, introduce them to a potential client. For Chicago and tech in the Midwest to hit on all cylinders, everyone has to participate in the way they can participate."

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